276. Development rebate reserve in the case of industrial undertakings in which there is Government participation and where there are certain obligations for maintenance of reserve for development purposes – Earlier instruction contained in Board’s Letter F. No. 10/49/65-IT (A-I), dated 14-10-1965 superseded in part
1. Reference is invited to the Board’s Letter F. No. 10/49/65-IT(A-I),-dated14-10-1965 [see Sl. No. 266] which, inter alia explained the position regarding the creation of statutory reserve for allowance of development rebate as follows :
(a) In the case of certain industrial undertakings, particularly those in which there is Government participation either by way of capital, loan or guarantee, and where there are certain obligations by law or agreement about the maintenance of reserve for development purposes, the development rebate reserve may be treated as included in the said reserve though not specifically created as a development rebate reserve.
(b) In a case where the total income computed before allowing the development rebate is a loss, there was no legal obligation to create any statutory reserve in that year, as no development rebate would actually be allowed in that year.
(c) Where there was no deliberate contravention of the provisions, the Income-tax Officer may condone genuine deficiencies subject to the same being made good by the assessee through creation of adequate additional reserve in the current year’s books in which the assessment is framed.
2. The Supreme Court, in the case of Indian Overseas Bank Ltd. v. CIT [1970] 77 ITR 512 had occasion to consider the validity of the position as explained at (a) above. In that case, the Bank had not created any development rebate as such, although the books of account disclosed a substantial reserve under section 17 of the Banking Companies Act, 1949. On the claim of the Bank that reserve had been created for purposes of claiming development rebate, the Supreme Court held that the reserve contemplated under the Income-tax Act was altogether an independent reserve and since the taxpayer had not complied with the requirements for the creation of special development rebate reserve, it was not entitled to claim the allowance in question. The Supreme Court also observed that the entries in the account books were not ideal formalities. Thus the instructions of the Board set out above insofar as part (a) is concerned became inoperable. However, the position explained in parts ( b) and (c) above were not specifically considered by the Supreme Court in that decision. Taking note of the decision of the Supreme Court in Indian Overseas Bank’s case (supra) as well as a subsequent pronouncement of the Gujarat High Court in the case of Surat Textile Mills Ltd. v. CIT [1971] 80 ITR 1, the Board had withdrawn in 1972 the aforesaid circular dated 14-10-1965 to the extent it was superseded by the aforesaid Supreme Court decision and the judgment of the Gujarat High Court in Surat Textiles Ltd.’ case (supra).
3. It was also directed that past assessments be reviewed and suitable action taken to retrieve loss of revenue including securing of necessary disallowances by way of enhancement, etc., in appeals relying on the aforesaid judicial pronouncements. It would appear that this has been interpreted by the field officers as having withdrawn of not only part (a), but parts ( b) and (c) of para 1 above also, and rectificatory/revisionary action has been initiated in a number of cases.
4. It has been represented to the Board that their earlier instruction dated 14-10-1965 represented the correct position in law and that its withdrawal to the extent it was presumed to be overruled by the Supreme Court in Indian Overseas Bank’s case (supra) created unnecessary hardship to assessees. Some of the rectificatory actions taken had also reached the High Court for decision and in two separate decisions the Bombay High Court struck down the rectificatory order under section 154 in the case of Tata Iron & Steel Co. Ltd. v. N.C. Upadhyaya [1974] 96 ITR 1 and in a more detailed discussion on merits in the writ petition of Indian Oil Corpn. Ltd. v. S. Rajagopalan, ITO [1973] 92 ITR 241.
5. The Board have re-examined the issues involved and are of the view that except the clarification given in part (a) of para 1 above, which stands superseded by the aforesaid decision of the Supreme Court, the clarifications given in parts (b) and (c ) of para 1 above hold good.
Circular : No. 189 [F. No. 228/8/72-IT(A-II)], dated 30-1-1976.
JUDICIAL ANALYSIS
APPLIED IN – This circular was referred to and applied in Shri Shubhlakshmi Mills Ltd. v. Addl. CIT [1989] 177 ITR 193 (SC) with the following observations :
“In view of these decisions of the Hon’ble Supreme Court and several High Courts referred to above, we are of the opinion that even if there is a decision of the Supreme Court in the case of Shubhlaxmi Mills Ltd. (supra), benevolent circular of the Board has to be followed. As per the Board’s circular relied on by the assessee, the assessee is entitled to investment allowance irrespective of the income in that year. . . .” (p. 82)
EXPLAINED IN – In CIT v. Modi Spg. & Wvg. Mills Co. Ltd. [1991] 187 ITR 51 (SC), it was observed as under :
“. . . The Board stated to have re-examined the issue involved coming to the view that, except the clarification given in paragraph (a) above, which stood superseded by the decision of this Court in Indian Overseas Bank’s case [1970] 77 ITR 512, the clarifications given in paragraphs (b) and (c) quoted above hold good. It can thus legitimately be stated that the Board has itself opted for the view expressed in Tata Iron & Steel Co. Ltd.’s case [ 1 974] 96 ITR 1 (Bom.) and other cases of the kind taking the broader view in the matter. When the Board has itself opted for that view and that view is being followed by the Income-tax authorities concerned, we see no reason to do the exercise of taking any side of the two views and leave the matter at that. It is undisputed that the Board’s view is not only valid under the new Income-tax Act of 1961 but also under the Indian Income-tax Act, 1922, as well.” (pp. 53-54)
EXPLAINED IN – In Prakash Cotton Mills (P.) Ltd. v. CIT [1993] 70 Taxman 254 (Bom.), the abovesaid circular was explained with the following observations :
“The assessee has relied upon the circular issued by the CBDT’s Letter F. No. 10/49/65-IT(A-I), dated 14-10-1965 as clarified by another CBDT Circular No. 189, dated30-1-1976. As per the latter circular dated 30-1-1976 the original circular issued by the CBDT, dated 14-10-1965 dealt with three contingencies which are set out in Para 1 of that circular at (a), (b) and (c). We are concerned here with contingency (c) which is as follows :
“(c) Where there was no deliberate contravention of the provisions, the Income-tax Officer may condone genuine deficiencies subject to the same being made good by the assessee through creation of adequate additional reserve in the current year’s books in which the assessment is framed.” (p. 207)
The circular of 30-1-1976, after referring to various judgments of the Supreme Court and High Courts in paras 2, 3 and 4, has clarified that only Part (a) in Para 1 stands superseded by the decision of the Supreme Court referred to therein. Parts (b) and (c) of Para 1 hold good. It is, therefore, clarified that the withdrawal of the circular dated 14-10-1965 was confined only to Part (a) of Para 1.
After this clarificatory circular was issued, the Supreme Court has had an occasion to consider in passing part (b) of the circular of 14-10-1965 in the case of Shri Shubhlaxmi Mills Ltd v. Addl. CIT [1989] 177 ITR 193. The Supreme Court has held that in order to claim a deduction on account of development rebate under section 33(1), it is obligatory that the debit entry in the profit and loss account and the credit entry in a reserve account should be made in the relevant previous year in which the machinery or plant is installed or first put to use. It has observed at page 197:
” The circular dated 30th January, 1976 does not affect the true position in law.”
In view of section 34 which has been subsequently amended retrospectively, we need not, however, go into this aspect of the case relating to the binding nature of this circular at any length. We will assume for the sake of the present reference that Part (c) of Para 1 of the circular dated 30-1-1976 is in force and the department is bound to give the benefit of this part of the circular to the assessee. But in order that the assessee can claim the benefit of this part of the circular, it is contemplated that there should be no deliberate contravention of any provision of law by the assessee, only then the ITO is given the power to condone any genuine deficiencies subject to the assessee making good the deficiency through creation of additional reserve in the current year’s books in which the assessment is framed.”
EXPLAINED IN – In International Instruments (P.) Ltd. v. CIT [1980] 123 ITR 11 (Kar.), the abovesaid circular was explained with the following observations :
“. . . What had been actually withdrawn by the Board was a part of a Circular No. F. 10/49/65-IT A-I, dated 14th October, 1965, which contained certain general instructions. The remaining parts of that circular which did not conflict with the decision of the Supreme Court in Indian Overseas Bank Ltd v. CIT [1970] 77 ITR 512 remained intact. That it was so is clear from Circular No. 189, dated 30th January, 1976. . . .” (p. 22)
EXPLAINED IN – In Acropolymers (P.) Ltd. v. CIT [1985] 151 ITR 158 (Punj. & Har.), the abovesaid circular was explained with the following observations :
“. . . We would have gone on to steer the way but it has been brought to our notice that the Central Board of Direct Taxes has, in Circular No. 189, dated January 30, 1976, clarified the matter and put to rest the controversy. Pithily put, the matter has been summarized to mean that in case, where the total income had been computed before allowing the development rebate, there is a loss, there was no legal obligation to create any statutory reserve in that year, as no development rebate could actually be allowed in that year. That was the view of the Board even earlier as reflected in its Circular No. F. 10/49/65-ITA(I), dated October 14,1965. However, the aforesaid circular of 1965 pertaining to a different aspect in a different context, rubbed against the decision of the Supreme Court in Indian Overseas Bank Ltd. v. CIT [1970] 77 ITR 512. Taking note of the decision in Indian Overseas Bank Ltd.’s case, the Board, in 1972, withdrew the circular order of October 14, 1965, to the extent it was superseded by the aforesaid Supreme Court case [1970] 77 ITR 512 and the judgment of the Gujarat High Court in Surat Textile Mills Ltd v. CIT [1971] 80 ITR 1. Somehow, the field officers interpreted the partial withdrawal in the order of 1972 of the Board as if the entire circular dated October 14, 1965, stood withdrawn. This necessitated clarification at the hands of the Board in reiterating that the position with regard to the claiming of development rebate and creation of any statutory reserve in a year in which there was loss, remained the same as before. In so many words, the Board bowed down to the dictum in Indian Oil Corporation’s case [1973] 92 ITR 241 (Bom.). Thus, the position was and is that in case, where the total income had been computed before allowing the development rebate, there is a loss, there was no legal obligation to create any statutory reserve in that year, as no development rebate is actually to be allowed in that year.” (p. 160)
EXPLAINED IN – In CIT v. Metal Forging (P.) Ltd. [1984] 149 ITR 259 (Delhi), the abovesaid circular was explained with the following observations :
“As per these circulars the total income of the assessee being nil, there was no legal obligation on the part of the assessee to create the statutory reserve in the year of installation, i.e., the assessment year in question, and the assessee was entitled to the allowance of development rebate in the year in question and to get the entire amount of development rebate carried forward to be adjusted in the subsequent year. The Andhra Pradesh High Court in the case of CIT v. Agro Insecticides & Allied Industries [1981] 127 ITR 796, answered a similar question of law in favour of the assessee solely in view of the Board’s Circular No. 189, dated January 30,1976. The Allahabad High Court in Addl. CIT v. Vishnu Industrial Enterprises [1980] 122 ITR 919, also referred to these two circulars and observed that the Supreme Court in Navnit Lal C. Javeri v. K.K. Sen, AAC [1965] 56 ITR 198 and Ellerman Lines Ltd. v. CIT [1971] 82 ITR 913, has held that the income-tax authorities are bound by the Board’s Circulars and that the same are entitled to be given effect by the Courts as well. It was then held by the Allahabad High Court that these circulars supported the assessee’s contention which was the same as in the present case before us.
It was contended by Mr. Wazir Singh that the Supreme Court did not lay down law that all circulars issued by the Central Board of Direct Taxes are entitled to be given effect to and that these circulars relating to judicial discretion of the ITO cannot be given effect to by the Courts. No finding need be given in that regard. However, the fact remains that these circulars are admittedly operative and applicable to the case of the assessee….” (p. 273)
See also observations in Bharat Vijay Mills Ltd. v. ITO [1985] 154 ITR 786 (Guj.), extracted in the ‘Judicial analysis’ under Circular No. 259 dated 11-7-1979 (Sl. No. 274).
See also CIT v. Malyalam Manorama & Co. Ltd. [1983] 143 ITR 29 (Ker.).
